Whether to take professional indemnity insurance will remain a decision for Financial Advice Providers (FAPs).
Otherwise the standard conditions the Financial Markets Authority (FMA) has developed for full FAP licence holders is almost identical to the June consultation document.
The FMA acknowledged industry concerns with the costs of professional indemnity insurance and agreed that this issue is best left to the individual FAP to decide.
Seven standard conditions to apply
- Record keeping – adequate records must be retained in a form that ensures the integrity of the information, in English, available for inspection and kept for a minimum of seven years. This is the same as the record keeping condition for transitional licences. The requirement that records should be readily available within 10 days of being requested has been moved from the explanatory note section to become part of the condition itself.
- Internal complaints process – there must be an internal process for resolving client complaints that provides for complaints to be dealt with in a fair, timely and transparent manner, and kept on record. The standard condition wording is the same as applied to other licences under the Financial Markets Conduct Act (FMCA).
- Regulatory returns – all information necessary to monitor a FAP’s ongoing capability to meet the requirements of the FMCA must be provided to the FMA. The standard condition wording is the same wording that is applied to other licences under the Act.
- Outsourcing – arrangements must be in place to ensure that any outsourced systems or processes meet the FAP’s market service licence obligations. The FMA has provided guidance on important matters that should be considered when conducting due diligence on a proposed outsource provider.
- Business continuity and technology systems – plans must be maintained that are appropriate for the scale and scope of the financial advice service to ensure that disruptions are managed effectively.
- Ongoing eligibility – section 396 of the FMCA and, if applicable, section 400 specify the matters that the FMA must be satisfied of in order to grant a licence, or authorise an entity as an authorised body.
- Notification of material changes – the FMA must be notified in writing within 10 days of any material change to the nature of, or manner in which, the financial advice service is provided (the notification period originally proposed was five days). Examples of material changes would be implementing a digital advice service or engaging a person to provide regulated financial advice on your behalf for more than three months.
The three licence classes
The three different classes of financial advice providers have also been confirmed. Having different classes aims to streamline the licence applications and assessment criteria and allows clients to pick a licence that best suits their circumstance. The names of the classes have changed from ‘A, B and C’, as seen in the consultation document, to ‘1, 2 and 3’ but the classes are otherwise very similar. To summarise:
- Class 1 – covers the service of the licence holder and is applicable for a sole practice. It does not allow the use of interposed persons, authorised persons, authorised bodies, multiple financial advisers, or nominated representatives. Class 1 has been amended to allow an adviser to bring on a locum in their place. If this is for a period longer than three months the FMA must be notified.
- Class 2 – covers the service of a financial advice provider and permits the licence holder and any authorised bodies to engage nominated representatives on the financial advice provider’s own account and/or through one or more other financial.
- Class 3 – covers all of the services covered by a Class 1 and Class 2 licence, and permits the licence holder and any authorised bodies to engage any number of nominated representatives, along with any other type of structure permitted by the FMCA and not covered by Class 1 or 2.
The Financial Services Legislation Amendment Act will come into effect on 15 March 2021, giving FAPs a little over four months to plan in detail for their compliance with the new regime.
Key information on what the FMA will require as part of the full licensing application process is still eagerly awaited by the industry.